"the gray market for telecom equipment is growing," SHADES OF GRAY
by Vince Vittore
Telephony, Feb 25, 2002 Brought to you by:
It's a topic most carriers simply won't acknowledge, and those that do wish to remain anonymous, treating it instead as a sort of guilty pleasure. Yet the gray market for telecom equipment is growing, and it's starting to have a larger effect on carriers and their suppliers.
And while it's certainly more prevalent in the networking segment — where routers and hubs can be found in the inventory of virtually any liquidator — some gray market dealers have been stocking up on more unusual items such as Class 4/5 switches.
By various estimates, the five big traditional telecom equipment vendors — Alcatel, Ericsson, Lucent Technologies, Nortel Networks and Siemens — lost somewhere north of $9 billion in 2001. And next-generation vendors such as Ciena, Cisco Systems and Sycamore Networks aren't dazzling the market, either.
That doesn't matter to someone like Rhonda Handke. In fact, as telecom vendors continue to struggle amid capital expense budgets that are expected to be about 20% less than last year, Handke is predicting a record year for her company's segment.
Working from headquarters in Irvine, Calif., Handke's employer, Telmar Network Technology, operates in the booming gray market for telecom equipment — though calling it the gray market gets the same response as calling a flea market seller a junk dealer.
In fact, the gray market tends to encompass everyone from liquidators that don't care if they're selling routers or coffee machines to full-service companies that provide custom engineering services. Talk to a number of the gray market dealers long enough, though, and the comparison to used car dealers is bound to come up.
And to most, it doesn't matter.
“We don't think the market [for new equipment] is going to pick up until 2004, but for us, it's opportunity,” said Handke, vice president of sales and marketing for Telmar.
Referring to themselves by the more euphemistic terms “refurbishers” or “product re-distributors,” dozens of companies have set up shop to take advantage of the burgeoning market in “gently used” telecom equipment.
Telmar, like a handful of others, tends to be fairly selective with what equipment it will take in, and it considers itself to be on the high end of the market. It's got plenty of competition from other refurbishers as well as liquidators that are putting a surprising number of high-end items up for auction on the Web, including eBay's site. (A recent listing from a Nashville reseller offered a Nortel DMS-500 switch for $350,000; the auction ended with no bidders).
In the middle of the pack are companies like Group Midwest, a Canton, Ohio-based outfit that refers to its operations as “reverse logistics.” Working almost exclusively with vendors and occasionally with other resellers, the company procures out-of-date computing, networking and telecom equipment, assesses its resalability and either strips it down to its basic elements of plastic, glass and metal or resells it to other vendors at discounts of roughly 50%, though often more.
“About 75% of what we bring in is scrap,” said Donny Grisez, service manager for Group Midwest. “The other 25% is reusable. A lot of the networking equipment goes right back out the door.”
Originally founded as a company to break down obsolete PCs, Group Midwest markets itself with a tough environmental policy. “We can guarantee that nothing goes into the ground,” Grisez said. “It takes all the liability away from [vendors].”
To be sure, the refurbishers and other gray market dealers operate in a corner of the overall telecom universe that would hardly threaten the biggest vendors. According to one estimate from Fletcher Spaght, the reused plug-in market hit $1 billion in late 1999, representing just 6% of the overall plug-in market and a fraction of the $14.5 billion to $19.7 billion spent on central office switching and transmission equipment that year. But according to the same survey, that market should reach up to $2.2 billion or a little more than 8% of the overall CO switching and transmission market.
Anecdotal evidence suggests, however, that all forms of refurbishment dealers are making headway into the telco market. SBC Communications in 2000 awarded Telmar a Gold Award for quality supply services. And Qwest Communications Chairman and CEO Joe Nacchio has told analysts that one way the company plans to cut costs is by squeezing suppliers and using various supply channels.
For many reasons, including fear of being identified as the discount brand by high-value enterprise users, most carriers don't openly talk about their use of the aftermarket as an equipment source. Regardless, the market is attracting attention.
“We look for equipment that can have an immediate impact, either for live operations or to augment development and testing capabilities,” said one carrier's chief technology officer who didn't want to be identified. “For live operations, we look for specific items that we're already using elsewhere and where the price of 10 to 20¢on the dollar justifies some of the risk. For development and testing, we're generally buying stuff for 10¢ on the dollar that we simply would not get if we had to pay full price.”
For vendors, such attitudes are more than just a challenge in a market that is charitably described as difficult; they're often taken as a direct threat. Though more prevalent with pure networking equipment such as routers, some equipment vendors have started to fight back by putting pressure on equipment buyers.
Nortel, whose equipment is among the most listed on popular online auction sites, has set up the Gray Market Task Force within its enterprise group as part of an overall effort to “educate” end users about the potential danger of buying from unauthorized dealers. The vendor also checks the bar codes on all products that are returned for warranty and repair reasons. Any product that doesn't match up with Nortel's record will not be serviced.
Other vendors have been known to take more aggressive measures, including forcing carriers into buying software contracts on equipment bought through gray market dealers. In one instance, Cisco told a carrier that equipment bought through a gray market dealer does not include software licenses and could not be technically legally owned and used, according one carrier executive.
Not all vendors see the gray market as a threat. Alcatel had been keeping an eye on liquidators and others after dozens of CLECs went belly up, according to Claire Lewis, vice president of marketing for Alcatel USA. However, much of the equipment never resurfaced in part, she thinks, because of the difficulty in repurposing specialized telecom gear. “A lot of the equipment is really customized and optimized for each customer,” she said. “For that equipment to be refurbished is really more expensive than starting fresh.”
In the current environment, gray market outfits are winning the battle on some fronts. In fact, in the upper end of the market, several gray market vendors don't view themselves at all as competitors to existing vendors. Instead, they view their place as an important outlet for vendors trying to unload product prior to new-generation introductions or at the end of quarters when numbers must be made.
Telmar, for instance, has developed a consignment program in which it will take in excess inventory and sell it for a percentage of the revenue. Its inventory control system also has been developed to conform with Telcordia's part number database, said Gary McMullin, executive vice president of quality for Telmar.
“The part number defines form, fit and function,” he said. “Our database allows us to track an inventory item and where we have it. We also link with 450 suppliers and track their inventory.”
Telmar also offers product testing as well as CO frame and cell site configuration at its warehouses, giving it another differentiator from the scads of liquidators. “We actually provide retesting of returned material so we can weed out problems with things like interfaces,” McMullin said.
The interweaving of vendors and gray market dealers also is having an effect on the way some traditional telecom vendors view product distribution. Acterna in February launched a “rent-to-own” program with lease-rental partners in which buyers can apply rental payments toward the purchase of equipment.
As part of the program, Acterna allows companies to rent equipment on a per-month basis. Leases can be converted into purchases at any point during the agreement with all of the previous lease payments going toward the purchase.
“A lot of people hesitate on a rental unless it's truly a short-term situation,” said John D'Anna, senior vice president of North American sales for Acterna.
For customers, the rental route keeps the equipment assets off the balance sheet and lets them use sources other than precious capital expense dollars to pay for equipment. For Acterna, the proposition takes away a significant amount of risk because lease-rental provides financing. At the same time, it opens up a customer base that would normally be too much of a credit risk.
Said D'Anna: “This was a way of approaching our customers in a tight financial market.” |
